The Economist - USA (2022-05-21)

62 Business TheEconomistMay21st 2022

Drawing a blank

Stockmarket indices, May 17th 2021=100

Source:RefinitivDatastream

2

140

120

100

80

60

40

20

2021 2022

De-SPAC

NASDAQ

Composite

S&P 5

The big­shots (or “sponsors”) who erect the

empty shells are typically given 24 months

to find a business to acquire (or to de­spac,

in  Wall  Street  lingo).  They  are  struggling:

27  such  transactions  were  announced  in

the  first  three  months  of  2022,  compared

with 77 during the same period in 2021. Of

the 298 spacs listed in the go­go first quar­

ter  of  2021,  raising  $97bn,  196  have  yet  to

announce  a  de­spacing.  In  all,  more  than

600 American­listed spacs are still search­

ing for a target. That is a lot of clocks count­

ing down, and a lot of unspent cash. Where

is it all now? 

Ironically,  much  of  this  money,  once

chasing  some  of  the  riskiest  tech  bets  out

there, has been parked in finance’s dullest

quarter.  Approximately  $160bn  currently

sits in trust accounts, invested in risk­free

Treasuries.  It  could  be  ploughed  into  the

next  white­hot  tech  stocks  in  early  2023,

when  the  countdowns  end  and  investors’

cash  is  returned.  Until  then,  being  locked

up  in  a  spac without  the  prospect  of  a

merger  resembles  investing  in  a  money­

market fund. Investors profit from the dif­

ference  between  its  trading  price  and  the

money  returned  upon  its  liquidation.  At

present,  the  average  yield­to­maturity  on

these blank cheques is above 3%.

Astute  investors  know  better  than  to

hang around for the blank cheque to blos­

som  into  a  real  business.  After  a  spac an­

nounces  a  merger,  investors  are  given  the

chance  to  redeem  their  shares  and  have

their  investment  returned.  Average  re­

demptions are running at more than 50%.

Excluding  additional  funding  and  deals

hanging in limbo between announcement

and  completion,  The Economistcalculates

that less than $40bn of capital invested in

spacs  since  2020  has  found  its  way  onto

the  balance­sheet  of  an  operating  compa­

ny. That is roughly the valuation at which

Grab, a South­East Asian super­app, tied up

with a spac in December 2021.

Investors in de­spaced firms have fared

far worse than those in spacs wanting for a

target.  One  recent  study  finds  that  barely

more than a third hit their revenue projec­

tions.Manyareshortofcash.Almosthalf

ofthecompaniesincludedinthede­spac

indexarecurrentlyburningthroughcash

fastenoughtoemptytheircofferswithin

twoyears.ThismonthCanoo,anelectric­

vehicle maker whose investorpresenta­

tionbenchmarkeditsvaluationtoNetflix

andTesla,expressed “substantialdoubt”

aboutitsfutureasa goingconcern.

Anindextracking 25 largecompanies

whichwentpublicthroughde­spactran­

sactionsisdownby52%thisyear,com­

paredwitha27%fallforthetech­heavy

nasdaq(seechart2).Grabisnowworth

$10bn.Thedilutioncausedbyfreeshares

designedtocompensateaspac’ssponsor

magnifiesthesector’slosses.

Unsurprisingly, then, spacs are once

againparadedassymbolsofmarketexcess,

wheremoonshotassetswerepursuedat

otherwordly valuations. In practice, a

stockmarketcorrectionandincreasedreg­

ulatory scrutiny means the majority of

spacinvestorswillneverseetheircashput

towork.Theyaretheluckyones.n

Retailing

Supermarket crash

W

almart went from  strength  to

strength  during  the  covid­19  pan­

demic.  Its  years­long  investments  in  on­

line  fulfilment  finally  began  to  pay  off  as

virus­wary  shoppers  swapped  aisles  for

apps.  As  inflation  picked  up  initially,  its

“everyday  low  prices”  looked  even  more

appealing  than  usual.  And  investors  ap­

peared  to  believe  that  it  had  the  power  to

make those prices a bit less low, passing its

own rising costs without putting off shop­

pers or sacrificing margins. 

On  May  17th  economic  reality  finally

caught  up  with  America’s  supermarket  ti­

tan. The company reported quarterly earn­

ings that fell short of even the most conser­

vative analysts’ estimates, blaming chiefly

supply­chain  snags  and  the  rising  cost  of

labour and transport. Its share price fell by

11%, a daily drop second only to the one the

firm experienced in the trading session be­

fore  the  Black  Monday  stockmarket  crash

in  1987.  A  day  later  it  slid  by  another  7%.

The same day Target, another pandemic re­

tail  star,  reported  similarly  disappointing

results, wiping out 25% of its market value.

The  two  companies  shed  a  combined

$65bn in market capitalisation in the space

of two days.

Historically, inflation has often benefit­

ed big supermarkets. Elevated prices boost

the  nominal  value  of  sales.  As  for  higher

unit costs, these could often be passed on

to shoppers, who are likelier to keep need­

ing supermarkets staples and less likely to

gripe  about  higher  bills  if  everything  else

they buy is also dearer. This time, though,

the retailers are finding it harder to offset

the  steep  increase  in  operating  expenses.

Target’s chief executive, Brian Cornell, an­

ticipates  an  extra  $1bn  in  transport  costs

this year as soaring energy prices dent pro­

fits.  It  is  already  raising  prices  in  re­

sponse—evidently not fast enough. 

Walmart, far bigger of the two, is better

placed to absorb some of the higher costs.

But even the Beast of Bentonville now ex­

pects earnings to decline by 1% this year. In

addition  to  costlier  transport,  Walmart

also  reported  higher  wage  costs,  not  least

as  a  result  of  a  hiring  spree  to  ensure

Rising costs catch up with America’s

big retailers

Things get messy for Walmart